filings.toolsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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Management’s discussion and analysis of financial condition and results of operations (“MD&A”) should be read in conjunction with our Consolidated Condensed Financial Statements included under Item 1 of this Report, Risk Factors included under Part II, Item 1A of this Report, Risk Factors included in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2021 and June 30, 2021 and the Consolidated Financial Statements, Risk Factors, and MD&A included in our Annual Report on Form 10-K for the year ended December 31, 2020. This MD&A is comprised of the following sections:
| Page No. | |
|---|---|
| Overview | 37 |
| Results of Operations | 38 |
| Consolidated Financial Results | 38 |
| CNA Financial | 39 |
| Boardwalk Pipelines | 48 |
| Loews Hotels & Co | 49 |
| Corporate | 50 |
| Diamond Offshore | 51 |
| Liquidity and Capital Resources | 51 |
| Parent Company | 51 |
| Subsidiaries | 52 |
| Investments | 53 |
| Critical Accounting Estimates | 56 |
| Accounting Standards Update | 57 |
| Forward-Looking Statements | 57 |
OVERVIEW
Loews Corporation is a holding company and has four reportable segments comprised of three individual consolidated operating subsidiaries, CNA Financial Corporation (“CNA”), Boardwalk Pipeline Partners, LP (“Boardwalk Pipelines”) and Loews Hotels Holding Corporation (“Loews Hotels & Co”); and the Corporate segment. In the first quarter of 2020, Diamond Offshore Drilling Inc. (“Diamond Offshore”) was a reportable segment; Diamond Offshore was deconsolidated during the second quarter of 2020. The Corporate segment is primarily comprised of Loews Corporation, excluding its subsidiaries, and the operations of Altium Packaging LLC (“Altium Packaging”) through March 31, 2021. On April 1, 2021, Loews Corporation sold 47% of its interest in Altium Packaging to GIC, Singapore’s sovereign wealth fund, for $420 million in cash consideration. As a result of the terms of this transaction, Loews Corporation shares certain participating rights with GIC related to capital allocation and other decisions and was therefore required to deconsolidate Altium Packaging as of the date of the sale under accounting principles generally accepted in the United States of America (“GAAP”). Subsequent to deconsolidation, Loews Corporation’s investment in Altium Packaging is accounted for under the equity method of accounting, with Equity income (loss) reported in Operating expenses and other on the Consolidated Condensed Statements of Operations in the Corporate segment. For further information on the deconsolidations of Diamond Offshore and Altium Packaging see Note 2 of the Notes to Consolidated Condensed Financial Statements included under Item 1 of this Report.
Unless the context otherwise requires, the term “Company” as used herein means Loews Corporation including its consolidated subsidiaries, the terms “Parent Company,” “we,” “our,” “us” or like terms as used herein mean Loews Corporation excluding its subsidiaries, the term “Net income (loss) attributable to Loews Corporation” as used herein means Net income (loss) attributable to Loews Corporation shareholders and the term “subsidiaries” means Loews Corporation’s consolidated subsidiaries.
We rely upon our invested cash balances and distributions from our subsidiaries to generate the funds necessary to meet our obligations and to declare and pay any dividends to shareholders. The ability of subsidiaries to pay dividends is subject to, among other things, the availability of sufficient earnings and funds in such subsidiaries, applicable state laws, including in the case of the insurance subsidiaries of CNA, laws and rules governing the payment of dividends by regulated insurance companies (see Note 14 of the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2020) and compliance with covenants in their respective loan agreements. Claims of creditors of our subsidiaries will generally have priority as to the assets of such subsidiaries over our claims and those of our creditors and shareholders.
RESULTS OF OPERATIONS
Consolidated Financial Results
The following table summarizes net income (loss) attributable to Loews Corporation by segment and net income (loss) per share attributable to Loews Corporation for the three and nine months ended September 30, 2021 and 2020:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| (In millions, except per share data) | ||||||||||||||||
| CNA Financial | $ | 229 | $ | 192 | $ | 838 | $ | 272 | ||||||||
| Boardwalk Pipelines | 38 | 20 | 170 | 123 | ||||||||||||
| Loews Hotels & Co | 13 | (47 | ) | (51 | ) | (144 | ) | |||||||||
| Corporate | (60 | ) | (26 | ) | 278 | (1,103 | ) | |||||||||
| Diamond Offshore | (476 | ) | ||||||||||||||
| Net income (loss) attributable to Loews Corporation | $ | 220 | $ | 139 | $ | 1,235 | $ | (1,328 | ) | |||||||
| Basic net income (loss) per share | $ | 0.86 | $ | 0.50 | $ | 4.71 | $ | (4.70 | ) | |||||||
| Diluted net income (loss) per share | $ | 0.85 | $ | 0.50 | $ | 4.70 | $ | (4.70 | ) |
Net income attributable to Loews Corporation for the three months ended September 30, 2021 was $220 million, or $0.85 per share, compared to $139 million, or $0.50 per share in the comparable 2020 period. Net income attributable to Loews Corporation for the nine months ended September 30, 2021 was $1.2 billion, or $4.70 per share, compared to a net loss of $1.3 billion, or $4.70 per share in the comparable 2020 period.
Each of the company’s consolidated subsidiaries, CNA Financial Corporation, Boardwalk Pipelines, and Loews Hotels & Co, contributed meaningfully to the year-over-year increase in Loews’s 2021 third quarter net income as compared to the comparable 2020 period. As compared to the third quarter of 2020, CNA benefited from higher Property & Casualty non-catastrophe current accident year underwriting results and improved Life & Group business results primarily due to the absence of the active life premium deficiency charge recorded in the third quarter of 2020, partially offset by higher net catastrophe losses and lower investment gains. Loews Hotels & Co posted significantly improved year-over-year third quarter results due to the continuing rebound in leisure travel, especially at resort destinations. Boardwalk Pipelines revenues for the third quarter of 2021 increased compared to the comparable prior year period, reflecting the impact of recently completed growth projects and higher system utilization. The parent company investment portfolio experienced lower net investment income in the third quarter of 2021 compared to the comparable prior year period.
The improved results for the nine months ended September 30, 2021 compared to the comparable 2020 period are due to higher Property & Casualty non-catastrophe current accident year underwriting results at CNA, improved results for CNA’s Life & Group business which benefited from the absence of the active life premium deficiency charge recorded in the third quarter of 2020, lower net catastrophe losses at CNA, significantly higher net investment income at CNA and the parent company, and investment gains in 2021 as compared to losses in 2020 at CNA and in the parent company investment portfolio. All other segment improvements for the nine months ended September 31, 2021 as compared to the comparable 2020 period are primarily due to the reasons discussed in the three month comparison above. In addition, the nine months ended September 30, 2021 include a gain of $438 million (after tax) related to the sale of 47% of Altium Packaging and its deconsolidation on April 1, 2021. The nine months ended September 30, 2020 included a loss of $957 million (after tax), related to the bankruptcy filing and deconsolidation of Diamond Offshore, and impairment charges totaling $774 million ($408 million after tax and noncontrolling interests) at Diamond Offshore in the first quarter of 2020, prior to deconsolidation.
CNA Financial
The following table summarizes the results of operations for CNA for the three and nine months ended September 30, 2021 and 2020 as presented in Note 11 of the Notes to Consolidated Condensed Financial Statements included under Item 1 of this Report. For further discussion of Net investment income and Investment gains (losses), see the Investments section of this MD&A.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| (In millions) | ||||||||||||||||
| Revenues: | ||||||||||||||||
| Insurance premiums | $ | 2,059 | $ | 1,953 | $ | 6,056 | $ | 5,672 | ||||||||
| Net investment income | 513 | 517 | 1,608 | 1,380 | ||||||||||||
| Investment gains (losses) | 22 | 46 | 117 | (101 | ) | |||||||||||
| Non-insurance warranty revenue | 357 | 317 | 1,054 | 926 | ||||||||||||
| Other revenues | 8 | 7 | 19 | 20 | ||||||||||||
| Total | 2,959 | 2,840 | 8,854 | 7,897 | ||||||||||||
| Expenses: | ||||||||||||||||
| Insurance claims and policyholders’ benefits | 1,632 | 1,616 | 4,684 | 4,683 | ||||||||||||
| Amortization of deferred acquisition costs | 368 | 360 | 1,084 | 1,046 | ||||||||||||
| Non-insurance warranty expense | 330 | 293 | 973 | 859 | ||||||||||||
| Other operating expenses | 287 | 268 | 874 | 851 | ||||||||||||
| Interest | 28 | 52 | 85 | 114 | ||||||||||||
| Total | 2,645 | 2,589 | 7,700 | 7,553 | ||||||||||||
| Income before income tax | 314 | 251 | 1,154 | 344 | ||||||||||||
| Income tax expense | (59 | ) | (36 | ) | (219 | ) | (40 | ) | ||||||||
| Net income | 255 | 215 | 935 | 304 | ||||||||||||
| Amounts attributable to noncontrolling interests | (26 | ) | (23 | ) | (97 | ) | (32 | ) | ||||||||
| Net income attributable to Loews Corporation | $ | 229 | $ | 192 | $ | 838 | $ | 272 |
Three Months Ended September 30, 2021 Compared to the Comparable 2020 Period
Net income attributable to Loews Corporation increased $37 million for the three months ended September 30, 2021 as compared with the comparable 2020 period primarily due to the absence of a $74 million charge ($52 million after tax and noncontrolling interests) related to the recognition of an active life reserve premium deficiency for long term care policies in the third quarter of 2020. Results for the three months ended September 30, 2021 also included improved non-catastrophe current accident year underwriting results. The three months ended September 30, 2020 also included a $14 million charge (after tax and noncontrolling interests) related to the early retirement of debt. These increases were partially offset by lower investment gains and net catastrophe losses of $178 million ($125 million after tax and noncontrolling interests) for the three months ended September 30, 2021 as compared to $160 million ($112 million after tax and noncontrolling interests) in the comparable 2020 period. Net catastrophe losses for the three months ended September 30, 2021 included $114 million for Hurricane Ida. Net catastrophe losses for the three months ended September 30, 2020 were driven by severe weather-related events, primarily Hurricanes Laura, Isaias and Sally and the Midwest derecho.
Nine Months Ended September 30, 2021 Compared to the Comparable 2020 Period
Net income attributable to Loews Corporation increased $566 million for the nine months ended September 30, 2021 as compared with the comparable 2020 period primarily due to improved current accident year underwriting results. Net catastrophe losses were $357 million ($251 million after tax and noncontrolling interests) for the nine months ended September 30, 2021 as compared to $536 million ($377 million after tax and noncontrolling interests) in the comparable 2020 period. Net catastrophe losses for the nine months ended September 30, 2021 were driven by severe weather-related events, primarily Hurricane Ida and Winter Storms Uri and Viola. Net catastrophe losses for the nine months ended September 30, 2020 included $273 million primarily related to severe weather-related events, $195 million related to COVID-19 and $68 million related to civil unrest. Results also reflect higher net investment income and investment gains during the nine months ended September 30, 2021 as compared with investment losses in the comparable 2020 period. Higher net investment income was driven by limited partnership and common stock returns and investment gains were driven by lower impairment losses and the favorable change in fair value of non-redeemable preferred stock for the nine months ended September 30, 2021 as compared with the comparable 2020
period. Results for the nine months ended September 30, 2021 also reflect the absence of a $74 million charge ($52 million after tax and noncontrolling interests) related to the recognition of an active life reserve premium deficiency for long term care policies in the comparable 2020 period.
CNA’s Property & Casualty and Other Insurance Operations
CNA’s commercial property and casualty insurance operations (“Property & Casualty Operations”) include its Specialty, Commercial and International lines of business. CNA’s Other Insurance Operations outside of Property & Casualty Operations include its long term care business that is in run-off, certain corporate expenses, including interest on CNA’s corporate debt, certain property and casualty businesses in run-off, including CNA Re, Asbestos & Environmental Pollution (“A&EP”), excess workers’ compensation and legacy mass tort. We believe the presentation of CNA as one reportable segment is appropriate in accordance with applicable accounting standards on segment reporting. However, for purposes of this discussion and analysis of the results of operations, we provide greater detail with respect to CNA’s Property & Casualty Operations and Other Insurance Operations to enhance the reader’s understanding and to provide further transparency into key drivers of CNA’s financial results.
Effective January 1, 2021, and in connection with the ceding of certain legacy reserves under a retroactive reinsurance agreement executed in February 2021, CNA changed the presentation of a legacy portfolio of excess workers’ compensation policies relating to business written in 2007 and prior. This business, which was previously reported as part of the Commercial business, is now reported as part of the Other Insurance Operations business. See Note 5 of the Notes to Consolidated Condensed Financial Statements included under Item 1 of this Report for further information on this retroactive reinsurance agreement. In addition, a determination was made to change the presentation of certain legacy mass tort reserves. Similar to the aforementioned excess workers’ compensation legacy business, these legacy mass tort reserves were previously reported in the Commercial business and are now reported as part of the Other Insurance Operations business. These changes were made to better reflect the manner in which CNA is organized for purposes of making operating decisions and assessing performance. Prior period information has been conformed to the new presentation.
In assessing its insurance operations, CNA utilizes the core income (loss) financial measure. Core income (loss) is calculated by excluding from net income (loss), investment gains or losses and any cumulative effects of changes in accounting guidance. In addition, core income (loss) excludes the effects of noncontrolling interests. The calculation of core income (loss) excludes investment gains or losses because investment gains or losses are generally driven by economic factors that are not necessarily reflective of CNA’s primary insurance operations. Core income (loss) is deemed to be a non-GAAP financial measure and management believes this measure is useful for investors to evaluate its insurance operations. Please see the non-GAAP reconciliation of core income (loss) to net income (loss) that follows in this MD&A.
Recent Developments
As previously disclosed, CNA sustained a sophisticated cybersecurity attack in March of 2021 involving ransomware that caused a network disruption and impacted certain of its systems. CNA has incurred expenses within Other Insurance Operations related to the cybersecurity attack and expects these expenses will continue. Additionally, CNA anticipates making continued investments in technology to improve its security and infrastructure, which will increase expenses in future periods. While CNA does not believe that the March 2021 cybersecurity attack will have a material impact on its business, results of operations or financial condition, no assurances can be given at this time as it continues to assess the full impact from the incident, including costs, expenses and insurance coverage.
Property & Casualty Operations
In evaluating the results of Property & Casualty Operations, CNA utilizes the loss ratio, the loss ratio excluding catastrophes and development, the expense ratio, the dividend ratio, the combined ratio and the combined ratio excluding catastrophes and development. These ratios are calculated using GAAP financial results. The loss ratio is the percentage of net incurred claim and claim adjustment expenses to net earned premiums. The loss ratio excluding catastrophes and development excludes net catastrophes losses and changes in estimates of claim and claim adjustment expense reserves, net of reinsurance, for prior years from the loss ratio. The expense ratio is the percentage of insurance underwriting and acquisition expenses, including the amortization of deferred acquisition costs, to net earned premiums. The dividend ratio is the ratio of policyholders’ dividends incurred to net earned premiums. The combined ratio is the sum of the loss, expense and dividend ratios. The combined ratio excluding catastrophes and development is the sum of the loss ratio excluding catastrophes and development, the expense ratio and the dividend ratio. In addition, renewal premium change, rate, retention and new business are also utilized in evaluating operating trends. Renewal premium change represents the estimated change in average premium on policies that renew, including rate and exposure changes. Rate represents the average change in price on policies that renew excluding exposure change.
For certain products within Small Business, where quantifiable, rate includes the influence of new business as well. Exposure represents the measure of risk used in the pricing of the insurance product. Retention represents the percentage of premium dollars renewed in comparison to the expiring premium dollars from policies available to renew. Renewal premium change, rate and retention presented for the prior period are updated to reflect subsequent activity on policies written in the period. New business represents premiums from policies written with new customers and additional policies written with existing customers. Gross written premiums, excluding third party captives, represents gross written premiums excluding business which is ceded to third party captives, including business related to large warranty programs.
The following tables summarize the results of CNA’s Property & Casualty Operations for the three and nine months ended September 30, 2021 and 2020:
| Three Months Ended September 30, 2021 | Specialty | Commercial | International | Total | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In millions, except %) | ||||||||||||||||
| Gross written premiums | $ | 1,953 | $ | 1,010 | $ | 276 | $ | 3,239 | ||||||||
| Gross written premiums excluding third party captives | 943 | 1,005 | 276 | 2,224 | ||||||||||||
| Net written premiums | 822 | 831 | 256 | 1,909 | ||||||||||||
| Net earned premiums | 773 | 893 | 271 | 1,937 | ||||||||||||
| Net investment income | 116 | 141 | 14 | 271 | ||||||||||||
| Core income | 173 | 27 | 17 | 217 | ||||||||||||
| Other performance metrics: | ||||||||||||||||
| Loss ratio excluding catastrophes and development | 59.1 | % | 61.5 | % | 58.9 | % | 60.2 | % | ||||||||
| Effect of catastrophe impacts | 0.4 | 18.6 | 3.4 | 9.2 | ||||||||||||
| Effect of development-related items | (1.8 | ) | 0.5 | 1.1 | (0.3 | ) | ||||||||||
| Loss ratio | 57.7 | % | 80.6 | % | 63.4 | % | 69.1 | % | ||||||||
| Expense ratio | 30.6 | 30.4 | 32.1 | 30.7 | ||||||||||||
| Dividend ratio | (0.1 | ) | 0.6 | 0.2 | ||||||||||||
| Combined ratio | 88.2 | % | 111.6 | % | 95.5 | % | 100.0 | % | ||||||||
| Combined ratio excluding catastrophes and development | 89.6 | % | 92.5 | % | 91.0 | % | 91.1 | % | ||||||||
| Rate | 9 | % | 6 | % | 13 | % | 8 | % | ||||||||
| Renewal premium change | 8 | 8 | 12 | 9 | ||||||||||||
| Retention | 80 | 83 | 79 | 81 | ||||||||||||
| New business | $ | 147 | $ | 204 | $ | 54 | $ | 405 |
| Three Months Ended September 30, 2020 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Gross written premiums | $ | 1,855 | $ | 915 | $ | 238 | $ | 3,008 | ||||||||
| Gross written premiums excluding third party captives | 861 | 915 | 238 | 2,014 | ||||||||||||
| Net written premiums | 795 | 804 | 222 | 1,821 | ||||||||||||
| Net earned premiums | 734 | 857 | 236 | 1,827 | ||||||||||||
| Net investment income | 126 | 151 | 15 | 292 | ||||||||||||
| Core income | 168 | 41 | 27 | 236 | ||||||||||||
| Other performance metrics: | ||||||||||||||||
| Loss ratio excluding catastrophes and development | 60.0 | % | 60.8 | % | 60.1 | % | 60.5 | % | ||||||||
| Effect of catastrophe impacts | 1.0 | 17.0 | 3.0 | 8.7 | ||||||||||||
| Effect of development-related items | (2.0 | ) | 0.6 | 0.1 | (0.4 | ) | ||||||||||
| Loss ratio | 59.0 | % | 78.4 | % | 63.2 | % | 68.8 | % | ||||||||
| Expense ratio | 30.5 | 32.3 | 34.9 | 31.8 | ||||||||||||
| Dividend ratio | 0.6 | 0.3 | ||||||||||||||
| Combined ratio | 89.5 | % | 111.3 | % | 98.1 | % | 100.9 | % | ||||||||
| Combined ratio excluding catastrophes and development | 90.5 | % | 93.7 | % | 95.0 | % | 92.6 | % | ||||||||
| Rate | 13 | % | 11 | % | 17 | % | 12 | % | ||||||||
| Renewal premium change | 15 | 9 | 15 | 12 | ||||||||||||
| Retention | 87 | 82 | 69 | 82 | ||||||||||||
| New business | $ | 105 | $ | 168 | $ | 54 | $ | 327 |
| Nine Months Ended September 30, 2021 | Specialty | Commercial | International | Total | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In millions, except %) | ||||||||||||||||
| Gross written premiums | $ | 5,650 | $ | 3,284 | $ | 958 | $ | 9,892 | ||||||||
| Gross written premiums excluding third party captives | 2,656 | 3,176 | 958 | 6,790 | ||||||||||||
| Net written premiums | 2,350 | 2,622 | 783 | 5,755 | ||||||||||||
| Net earned premiums | 2,270 | 2,629 | 789 | 5,688 | ||||||||||||
| Net investment income | 367 | 463 | 42 | 872 | ||||||||||||
| Core income | 531 | 233 | 67 | 831 | ||||||||||||
| Other performance metrics: | ||||||||||||||||
| Loss ratio excluding catastrophes and development | 59.1 | % | 60.8 | % | 59.2 | % | 59.9 | % | ||||||||
| Effect of catastrophe impacts | 0.4 | 12.6 | 2.0 | 6.3 | ||||||||||||
| Effect of development-related items | (1.7 | ) | 0.6 | 0.3 | (0.4 | ) | ||||||||||
| Loss ratio | 57.8 | % | 74.0 | % | 61.5 | % | 65.8 | % | ||||||||
| Expense ratio | 30.4 | 31.4 | 33.3 | 31.3 | ||||||||||||
| Dividend ratio | 0.1 | 0.6 | 0.3 | |||||||||||||
| Combined ratio | 88.3 | % | 106.0 | % | 94.8 | % | 97.4 | % | ||||||||
| Combined ratio excluding catastrophes and development | 89.6 | % | 92.8 | % | 92.5 | % | 91.5 | % | ||||||||
| Rate | 10 | % | 8 | % | 13 | % | 10 | % | ||||||||
| Renewal premium change | 10 | 9 | 12 | 10 | ||||||||||||
| Retention | 84 | 82 | 76 | 82 | ||||||||||||
| New business | $ | 370 | $ | 615 | $ | 204 | $ | 1,189 |
| Nine Months Ended September 30, 2020 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Gross written premiums | $ | 5,331 | $ | 3,103 | $ | 822 | $ | 9,256 | ||||||||
| Gross written premiums excluding third party captives | 2,413 | 3,018 | 822 | 6,253 | ||||||||||||
| Net written premiums | 2,231 | 2,703 | 680 | 5,614 | ||||||||||||
| Net earned premiums | 2,124 | 2,470 | 699 | 5,293 | ||||||||||||
| Net investment income | 315 | 354 | 44 | 713 | ||||||||||||
| Core income | 354 | 113 | 15 | 482 | ||||||||||||
| Other performance metrics: | ||||||||||||||||
| Loss ratio excluding catastrophes and development | 59.8 | % | 60.1 | % | 60.1 | % | 59.9 | % | ||||||||
| Effect of catastrophe impacts | 5.7 | 14.3 | 8.9 | 10.1 | ||||||||||||
| Effect of development-related items | (2.1 | ) | 0.1 | (0.4 | ) | (0.8 | ) | |||||||||
| Loss ratio | 63.4 | % | 74.5 | % | 68.6 | % | 69.2 | % | ||||||||
| Expense ratio | 31.5 | 33.2 | 35.6 | 32.9 | ||||||||||||
| Dividend ratio | 0.1 | 0.6 | 0.3 | |||||||||||||
| Combined ratio | 95.0 | % | 108.3 | % | 104.2 | % | 102.4 | % | ||||||||
| Combined ratio excluding catastrophes and development | 91.4 | % | 93.9 | % | 95.7 | % | 93.1 | % | ||||||||
| Rate | 12 | % | 10 | % | 13 | % | 11 | % | ||||||||
| Renewal premium change | 13 | 9 | 11 | 11 | ||||||||||||
| Retention | 86 | 84 | 71 | 83 | ||||||||||||
| New business | $ | 275 | $ | 564 | $ | 184 | $ | 1,023 |
Three Months Ended September 30, 2021 Compared to the Comparable 2020 Period
Gross written premiums, excluding third party captives, for Specialty increased $82 million for the three months ended September 30, 2021 as compared with the comparable 2020 period driven by rate and higher new business. Net written premiums for Specialty increased $27 million for the three months ended September 30, 2021 as compared with the comparable 2020 period. The increase in net earned premiums for the three months ended September 30, 2021 was consistent with the trend in net written premiums for Specialty.
Gross written premiums for Commercial increased $95 million for the three months ended September 30, 2021 as compared with the comparable 2020 period driven by rate and higher new business. Net written premiums for Commercial increased $27 million for the three months ended September 30, 2021 as compared with the comparable 2020 period. The increase in net earned premiums for the three months ended September 30, 2021 was consistent with the trend in net written premiums for Commercial.
Gross written premiums for International increased $38 million for the three months ended September 30, 2021 as compared with the comparable 2020 period. Excluding the effect of foreign currency exchange rates, gross written premiums increased $26 million driven by rate and retention. Net written premiums for International increased $34 million for the three months ended September 30, 2021 as compared with the comparable 2020 period. Excluding the effect of foreign currency exchange rates, net written premiums increased $23 million for the three months ended September 30, 2021 as compared with the comparable 2020 period. The increase in net earned premiums for the three months ended September 30, 2021 was consistent with the trend in net written premiums for International.
Total core income decreased $19 million for the three months ended September 30, 2021 as compared with the comparable 2020 period primarily due to higher net catastrophe losses and lower net investment income, partially offset by improved non-catastrophe current accident year underwriting results.
Total net catastrophe losses were $178 million for the three months ended September 30, 2021 as compared with $160 million in the comparable 2020 period. For the three months ended September 30, 2021 and 2020, Specialty had net catastrophe losses of $3 million and $7 million, Commercial had net catastrophe losses of $166 million and $146 million and International had net catastrophe losses of $9 million and $7 million.
Favorable net prior year loss reserve development of $10 million and $15 million was recorded for the three months ended September 30, 2021 and 2020. For the three months ended September 30, 2021 and 2020, Specialty recorded favorable net prior year loss reserve development of $15 million and $16 million, Commercial recorded unfavorable net prior year loss reserve development of $2 million and $1 million and International recorded unfavorable net prior year loss reserve development of $3 million and no net prior year loss reserve development. Further information on net prior year loss reserve development is included in Note 5 of the Notes to Consolidated Condensed Financial Statements included under Item 1 of this Report.
Specialty’s combined ratio improved 1.3 points for the three months ended September 30, 2021 as compared with the comparable 2020 period due to a 1.3 point improvement in the loss ratio driven by improved current accident year underwriting results.
Commercial’s combined ratio increased 0.3 points for the three months ended September 30, 2021 as compared with the comparable 2020 period due to a 2.2 point increase in the loss ratio largely offset by a 1.9 improvement in the expense ratio. The increase in the loss ratio was driven by higher net catastrophe losses, which were 18.6 points of the loss ratio for the three months ended September 30, 2021 as compared with 17.0 points of the loss ratio in the comparable 2020 period. The improvement in the expense ratio was primarily due to higher net earned premiums and lower acquisition costs driven by ceded commissions.
International’s combined ratio improved 2.6 points for the three months ended September 30, 2021 as compared with the comparable 2020 period primarily due to a 2.8 point improvement in the expense ratio. The improvement in the expense ratio was driven by higher net earned premiums and lower acquisition costs.
Nine Months Ended September 30, 2021 Compared to the Comparable 2020 Period
Gross written premiums, excluding third party captives, for Specialty increased $243 million for the nine months ended September 30, 2021 as compared with the comparable 2020 period driven by rate and higher new business. Net written premiums for Specialty increased $119 million for the nine months ended September 30, 2021 as compared with the comparable 2020 period. The increase in net earned premiums for the nine months ended September 30, 2021 was consistent with the trend in net written premiums for Specialty.
Gross written premiums for Commercial increased $181 million for the nine months ended September 30, 2021 as compared with the comparable 2020 period driven by rate and higher new business. Net written premiums for Commercial decreased $81 million for the nine months ended September 30, 2021 as compared with the comparable 2020 period driven by the impact of the June 1, 2021 written premium catch-up resulting from the addition of the quota share treaty to the property reinsurance program. Excluding the impact of the June 1, 2021 written premium catch-up, net written premiums increased $31 million for the nine months ended September 30, 2021 as compared with the comparable 2020 period. Net earned premiums for Commercial increased $159 million for the nine months
ended September 30, 2021 as compared with the comparable 2020 period. The increase in net earned premiums for the nine months ended September 30, 2021 was partially impacted by a reduction in estimated audit premiums related to COVID-19 in 2020 for Commercial.
Gross written premiums for International increased $136 million for the nine months ended September 30, 2021 as compared with the comparable 2020 period. Excluding the effect of foreign currency exchange rates, gross written premiums increased $82 million driven by rate and higher new business. Net written premiums for International increased $103 million for the nine months ended September 30, 2021 as compared with the comparable 2020 period. Excluding the effect of foreign currency exchange rates, net written premiums increased $57 million for the nine months ended September 30, 2021 as compared with the comparable 2020 period. The increase in net earned premiums for the nine months ended September 30, 2021 was consistent with the trend in net written premiums for International.
Total core income increased $349 million for the nine months ended September 30, 2021 as compared with the comparable 2020 period primarily due to improved current accident year underwriting results and higher net investment income driven by limited partnership and common stock returns.
Total net catastrophe losses were $357 million for the nine months ended September 30, 2021 as compared with $536 million in the comparable 2020 period. For the nine months ended September 30, 2021 and 2020, Specialty had net catastrophe losses of $9 million and $120 million, Commercial had net catastrophe losses of $332 million and $354 million and International had net catastrophe losses of $16 million and $62 million.
Favorable net prior year loss reserve development of $36 million and $58 million was recorded for the nine months ended September 30, 2021 and 2020. For the nine months ended September 30, 2021 and 2020, Specialty recorded favorable net prior year loss reserve development of $40 million and $47 million, Commercial recorded unfavorable net prior loss reserve development of $2 million and favorable net prior year loss reserve development of $8 million and International recorded unfavorable net prior year loss reserve development of $2 million and favorable net prior year loss reserve development of $3 million. Further information on net prior year loss reserve development is included in Note 5 of the Notes to Consolidated Condensed Financial Statements included under Item 1 of this Report.
Specialty’s combined ratio improved 6.7 points for the nine months ended September 30, 2021 as compared with the comparable 2020 period due to a 5.6 point improvement in the loss ratio and a 1.1 point improvement in the expense ratio. The improvement in the loss ratio was primarily due to lower net catastrophe losses and improved non-catastrophe current accident year underwriting results. Net catastrophe losses were 0.4 points of the loss ratio for the nine months ended September 30, 2021, as compared with 5.7 points of the loss ratio in the comparable 2020 period. The improvement in the expense ratio was driven by higher net earned premiums.
Commercial’s combined ratio improved 2.3 points for the nine months ended September 30, 2021 as compared with the comparable 2020 period primarily due to a 1.8 point improvement in the expense ratio. The improvement in the expense ratio was primarily due to higher net earned premiums and a favorable acquisition ratio. Net catastrophe losses were 12.6 points of the loss ratio for the nine months ended September 30, 2021 as compared with 14.3 points of the loss ratio for the comparable 2020 period.
International’s combined ratio improved 9.4 points for the nine months ended September 30, 2021 as compared with the comparable 2020 period due to a 7.1 point improvement in the loss ratio and a 2.3 point improvement in the expense ratio. The improvement in the loss ratio was driven by lower net catastrophe losses, which were 2.0 points of the loss ratio for the nine months ended September 30, 2021 as compared with 8.9 points of the loss ratio in the comparable 2020 period, and improved non-catastrophe current accident year underwriting results. The improvement in the expense ratio was driven by a favorable acquisition ratio and higher net earned premiums.
Other Insurance Operations
The following table summarizes the results of CNA’s Other Insurance Operations for the three and nine months ended September 30, 2021 and 2020:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| (In millions) | ||||||||||||||||
| Net earned premiums | $ | 123 | $ | 127 | $ | 369 | $ | 380 | ||||||||
| Net investment income | 242 | 225 | 736 | 667 | ||||||||||||
| Core income (loss) | 20 | (43 | ) | 10 | (82 | ) |
Three Months Ended September 30, 2021 Compared to the Comparable 2020 Period
Core results improved $63 million for the three months ended September 30, 2021 as compared with the comparable 2020 period. Results for the three months ended September 30, 2021 included no unlocking event for active life reserves as a result of the gross premium valuation (“GPV”). Core results for the three months ended September 30, 2021 included a $31 million favorable impact from the reduction in long term care claim reserves resulting from the annual claim reserve reviews in the third quarter of 2021. Core results for the three months ended September 30, 2020 included a $59 million charge related to the recognition of an active life reserve premium deficiency for long term care policies. The results for the three months ended September 30, 2020 also included a $36 million charge related to the increase in structured settlement claim reserves partially offset by a $30 million favorable impact from the reduction in long term care claim reserves, both resulting from the annual claim reserve reviews in the third quarter of 2020.
Nine Months Ended September 30, 2021 Compared to the Comparable 2020 Period
Core results improved $92 million for the nine months ended September 30, 2021 as compared with the comparable 2020 period. The drivers of the improved results were generally consistent with the three month discussion above. In addition, core results for the nine months ended September 30, 2021 included lower unfavorable net prior year loss reserve development related to legacy mass tort exposures as compared with the comparable 2020 period. Core results for the nine months ended September 30, 2021 also reflect expenses related to the March 2021 cybersecurity attack, the recognition of a $12 million loss resulting from the legacy excess workers’ compensation loss portfolio transfer (“EWC LPT”) and lower amortization of the deferred gain related to the A&EP Loss Portfolio Transfer (“LPT”) as compared with the comparable 2020 period. For further information on the A&EP LPT, EWC LPT and net prior year loss reserve development see Note 5 of the Notes to Consolidated Condensed Financial Statements included under Item 1 of this Report.
Life & Group Policyholder Reserves
Annually, in the third quarter, CNA assesses the adequacy of its long term care future policy benefit reserves by performing a GPV to determine if there is a premium deficiency. See the Insurance Reserves section of our MD&A included under Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020 for further information on the reserving process.
The September 30, 2021 GPV indicated that the recorded reserves included a margin of approximately $72 million. A summary of the changes in the estimated reserve margin is presented in the table below:
| (In millions) | ||||
|---|---|---|---|---|
| Long term care active life reserve - change in estimated reserve margin | ||||
| September 30, 2020 estimated margin | $ | - | ||
| Changes in underlying discount rate assumptions (a) | 65 | |||
| Changes in underlying morbidity assumptions | 205 | |||
| Changes in underlying persistency assumptions | (233 | ) | ||
| Changes in underlying premium rate action assumptions | 27 | |||
| Changes in underlying expense and other assumptions | 8 | |||
| September 30, 2021 Estimated Margin | $ | 72 |
| (a) | Including cost of care inflation assumption. |
|---|
The increase in the margin in 2021 was primarily driven by changes in discount rate assumptions due to higher near term expected reinvestment rates and favorable changes to underlying morbidity assumptions. These favorable drivers were partially offset by unfavorable changes to underlying persistency assumptions.
CNA has determined that additional future policy benefit reserves for profits followed by losses are not currently required based on the most recent projections.
The table below summarizes the estimated pretax impact on CNA’s results of operations from various hypothetical revisions to its active life reserve assumptions. The annual GPV process involves updating all assumptions to management’s then current best estimate, and historically all significant assumptions have been revised each year. In the table below, CNA has assumed that revisions to such assumptions would occur in each policy type, age and duration within each policy group and would occur absent any changes, mitigating or otherwise, in the other assumptions. Although such hypothetical revisions are not currently required or anticipated, CNA believes they could occur based on past variances in experience and its expectations of the ranges of future experience that could reasonably occur. Any required increase in the recorded reserves resulting from a hypothetical revision in the table below would first reduce the margin in the carried reserves before it would affect results from operations. Any actual adjustment would be dependent on the specific policies affected and, therefore, may differ from the estimates summarized below. The estimated impacts to results of operations in the table below are after consideration of the existing margin.
| September 30, 2021 | Estimated Reduction to Pretax Income | |||
|---|---|---|---|---|
| (In millions) | ||||
| Hypothetical revisions | ||||
| Morbidity: | ||||
| 2.5% increase in morbidity | $ | 300 | ||
| 5% increase in morbidity | 600 | |||
| Persistency: | ||||
| 5% decrease in active life mortality and lapse | $ | 100 | ||
| 10% decrease in active life mortality and lapse | 300 | |||
| Discount rates: | ||||
| 25 basis point decline in new money interest rates | $ | 100 | ||
| 50 basis point decline in new money interest rates | 200 | |||
| Premium rate actions: | ||||
| 25% decrease in anticipated future premium rate increases | $ | - | ||
| 50% decrease in anticipated future premium rate increases | - |
Non-GAAP Reconciliation of Core Income (Loss) to Net Income
The following table reconciles core income (loss) to net income attributable to Loews Corporation for the three and nine months ended September 30, 2021 and 2020:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| (In millions) | ||||||||||||||||
| Core income (loss): | ||||||||||||||||
| Property & Casualty Operations | $ | 217 | $ | 236 | $ | 831 | $ | 482 | ||||||||
| Other Insurance Operations | 20 | (43 | ) | 10 | (82 | ) | ||||||||||
| Total core income | 237 | 193 | 841 | 400 | ||||||||||||
| Investment gains (losses) | 18 | 36 | 94 | (81 | ) | |||||||||||
| Consolidating adjustments including noncontrolling interests | (26 | ) | (37 | ) | (97 | ) | (47 | ) | ||||||||
| Net income attributable to Loews Corporation | $ | 229 | $ | 192 | $ | 838 | $ | 272 |
Boardwalk Pipelines
A significant portion of Boardwalk Pipelines’ revenues are fee-based, being derived from capacity reservation charges under firm agreements with customers, which do not vary significantly period to period, but are impacted by longer term trends in its business such as lower pricing on contract renewals and other factors. Boardwalk Pipelines’ operating costs and expenses do not vary significantly based upon the amount of products transported, with the exception of costs recorded in fuel and transportation expense, which are netted with fuel retained on our Consolidated Condensed Statements of Operations. For further information on Boardwalk Pipelines’ revenue recognition policies see Note 1 of the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2020.
The following table summarizes the results of operations for Boardwalk Pipelines for the three and nine months ended September 30, 2021 and 2020 as presented in Note 11 of the Notes to Consolidated Condensed Financial Statements included under Item 1 of this Report:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| (In millions) | ||||||||||||||||
| Revenues: | ||||||||||||||||
| Operating revenues and other | $ | 307 | $ | 289 | $ | 991 | $ | 926 | ||||||||
| Total | 307 | 289 | 991 | 926 | ||||||||||||
| Expenses: | ||||||||||||||||
| Operating and other | 215 | 219 | 641 | 633 | ||||||||||||
| Interest | 40 | 44 | 121 | 127 | ||||||||||||
| Total | 255 | 263 | 762 | 760 | ||||||||||||
| Income before income tax | 52 | 26 | 229 | 166 | ||||||||||||
| Income tax expense | (14 | ) | (6 | ) | (59 | ) | (43 | ) | ||||||||
| Net income attributable to Loews Corporation | $ | 38 | $ | 20 | $ | 170 | $ | 123 |
Three Months Ended September 30, 2021 Compared to the Comparable 2020 Period
Total revenues increased $18 million for the three months ended September 30, 2021 as compared with the comparable 2020 period. Including fuel and transportation expense, revenues increased $21 million, primarily driven by revenues from recently completed growth projects and higher utilization-based revenues.
Operating and other expenses decreased $4 million for the three months ended September 30, 2021 as compared with the comparable 2020 period. Excluding fuel and transportation expense, which was offset with operating revenues, operating and other expenses were essentially flat.
Interest expenses decreased $4 million for the three months ended September 30, 2021 as compared with the comparable 2020 period, primarily due to lower average interest rates and lower average outstanding long term debt balances.
Nine Months Ended September 30, 2021 Compared to the Comparable 2020 Period
Total revenues increased $65 million for the nine months ended September 30, 2021 as compared with the comparable 2020 period, primarily driven by recently completed growth projects and higher system utilization from colder winter weather experienced during the first quarter of 2021.
Operating and other expenses increased $8 million for the nine months ended September 30, 2021 as compared with the comparable 2020 period, primarily due to an increased asset base from recently completed growth projects.
Interest expense decreased $6 million for the nine months ended September 30, 2021 as compared with the comparable 2020 period, primarily due to lower average interest rates and lower average outstanding long term debt balances.
Loews Hotels & Co
The following table summarizes the results of operations for Loews Hotels & Co for the three and nine months ended September 30, 2021 and 2020 as presented in Note 11 of the Notes to Consolidated Condensed Financial Statements included under Item 1 of this Report:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| (In millions) | ||||||||||||||||
| Revenues: | ||||||||||||||||
| Operating revenue | $ | 107 | $ | 22 | $ | 222 | $ | 140 | ||||||||
| Gain on sale of assets | 24 | 37 | ||||||||||||||
| Revenues related to reimbursable expenses | 27 | 14 | 67 | 59 | ||||||||||||
| Total | 134 | 60 | 289 | 236 | ||||||||||||
| Expenses: | ||||||||||||||||
| Operating and other: | ||||||||||||||||
| Operating | 93 | 53 | 231 | 219 | ||||||||||||
| Asset impairments | 10 | 30 | ||||||||||||||
| Reimbursable expenses | 27 | 14 | 67 | 59 | ||||||||||||
| Depreciation | 15 | 15 | 47 | 45 | ||||||||||||
| Equity (income) loss from joint ventures | (26 | ) | 22 | (17 | ) | 51 | ||||||||||
| Interest | 8 | 8 | 25 | 24 | ||||||||||||
| Total | 117 | 122 | 353 | 428 | ||||||||||||
| Income (loss) before income tax | 17 | (62 | ) | (64 | ) | (192 | ) | |||||||||
| Income tax (expense) benefit | (4 | ) | 15 | 13 | 48 | |||||||||||
| Net income (loss) attributable to Loews Corporation | $ | 13 | $ | (47 | ) | $ | (51 | ) | $ | (144 | ) |
Loews Hotels & Co’s results have been significantly impacted by the COVID-19 pandemic. By April 2020, most hotel properties owned and/or operated by Loews Hotels & Co had temporarily suspended operations. These hotel properties gradually resumed operations at various times, culminating with all hotels having resumed operations by June 30, 2021. During 2021, occupancy rates have gradually improved as social distancing restrictions were scaled back and vaccinations helped reduce infection rates, with hotel properties located in resort destinations improving sooner than hotel properties located in city centers. However, occupancy levels have not reached pre-pandemic levels at many hotels owned and/or operated by Loews Hotels & Co.
The increase in operating revenues of $85 million and the increase in operating expenses of $40 million for the three months ended September 30, 2021 as compared with the comparable 2020 period, when operations were significantly impacted by the pandemic, was due to improved performance. For the nine months ended September 30, 2021 operating revenues improved by $82 million and operating expenses increased $12 million as compared with the comparable 2020 period. The nine-month comparison is impacted by pre-pandemic business levels prior to mid-March 2020 followed by results that were significantly impacted by the pandemic for the remainder of 2020. Through 2021, occupancy levels have gradually increased leading to improved revenues at most hotel properties, with operating expenses also increasing to support the increased demand levels. As all properties have not resumed all levels of pre-pandemic service offerings, hotel operating expenses, including staffing levels, will increase as those return.
Equity (income) loss from joint ventures improved $48 million and $68 million for the three and nine months ended September 30, 2021 as compared with the comparable 2020 periods driven by the resumption of operations and associated occupancy improvement at all joint venture hotels. The three months ended September 30, 2021 was the first quarter during which all 9,000 rooms that are part of the Universal Orlando Resort joint ventures were open for the full quarter. In addition, pre-opening costs included in equity (income) loss from joint ventures decreased $1 million and $8 million for the three and nine months ended September 30, 2021 as compared with the comparable 2020 periods.
Loews Hotels & Co considers events or changes in circumstances that indicate the carrying amount of its assets may not be recoverable. For the three and nine months ended September 30, 2020, Loews Hotels & Co recorded impairment charges of $10 million and $30 million to reduce the carrying value of certain assets to their estimated fair value.
Loews Hotels & Co recorded gains on the sale of assets of $24 million and $37 million for the three and nine months ended September 30, 2020 related to sales of an office building in the third quarter and an owned hotel in the second quarter.
Corporate
Corporate operations consist primarily of investment income, interest expense and administrative costs at the Parent Company. Investment income includes earnings on cash and short term investments held at the Parent Company to meet current and future liquidity needs, as well as results of limited partnership investments and the trading portfolio held at the Parent Company. Corporate also includes the operating results of Altium Packaging through March 31, 2021 and the loss related to the Parent Company’s equity method investment in Altium Packaging beginning on April 1, 2021, as a result of the sale of 47% of the Parent Company’s interest in Altium Packaging and the resulting deconsolidation. See Note 2 of the Notes to Consolidated Condensed Financial Statements included under Item 1 of this Report for further information.
The following table summarizes the results of operations for Corporate for the three and nine months ended September 30, 2021 and 2020 as presented in Note 11 of the Notes to Consolidated Condensed Financial Statements included under Item 1 of this Report:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| (In millions) | ||||||||||||||||
| Revenues: | ||||||||||||||||
| Net investment income (loss) | $ | (30 | ) | $ | 23 | $ | 40 | $ | (33 | ) | ||||||
| Investment gains (losses) | 540 | (1,211 | ) | |||||||||||||
| Operating revenues and other | 1 | 253 | 282 | 754 | ||||||||||||
| Total | (29 | ) | 276 | 862 | (490 | ) | ||||||||||
| Expenses: | ||||||||||||||||
| Operating and other | 27 | 275 | 365 | 810 | ||||||||||||
| Interest | 23 | 33 | 93 | 96 | ||||||||||||
| Total | 50 | 308 | 458 | 906 | ||||||||||||
| Income (loss) before income tax | (79 | ) | (32 | ) | 404 | (1,396 | ) | |||||||||
| Income tax (expense) benefit | 19 | 6 | (126 | ) | 293 | |||||||||||
| Net income (loss) attributable to Loews Corporation | $ | (60 | ) | $ | (26 | ) | $ | 278 | $ | (1,103 | ) |
Net investment loss for the Parent Company was $30 million for the three months ended September 30, 2021 as compared with net investment income of $23 million for the comparable 2020 period, primarily due to lower results from equity based investments in the Parent Company trading portfolio. Net investment income for the Parent Company for the nine months ended September 30, 2021 was $40 million as compared with a net investment loss of $33 million for the comparable 2020 period, primarily due to improved results from equity based investments in the Parent Company trading portfolio.
Investment gains of $540 million for the nine months ended September 30, 2021 were primarily due to a gain of $555 million ($438 million after tax) on the sale of 47% of Altium Packaging. Investment loss of $1.2 billion ($957 million after tax) for the nine months ended September 30, 2020 was due to the loss recognized upon deconsolidation of Diamond Offshore as a result of its Chapter 11 Filing.
Operating revenues and other include Altium Packaging revenues of $280 million for 2021, prior to its deconsolidation on April 1, 2021, and $253 million and $753 million for the three and nine months ended September 30, 2020.
Operating and other expenses decreased by $248 million and $445 million for the three and nine months ended September 30, 2021 as compared with the comparable 2020 periods primarily due to the deconsolidation of Altium Packaging as the three and nine months ended September 30, 2020 included $247 million and $729 million of Operating and other expenses for Altium Packaging. Operating and other expenses also include legal and other corporate overhead expenses at the Parent Company. In addition, pursuant to the deconsolidation of Altium Packaging, the related loss related to the Parent Company’s investment in Altium Packaging is included in Operating and other expenses.
Interest expenses decreased $10 million for the three months ended September 30, 2021 as compared with the comparable 2020 period primarily due to the deconsolidation of Altium Packaging as the three months ended September 30, 2020 included $12 million of interest expense for Altium packaging. Interest expenses decreased $3 million for the nine months ended September 30, 2021 as compared with the comparable 2020 period primarily due to the deconsolidation of Altium Packaging as of April 1, 2021, partially offset by the May 2020 issuance of the Parent Company’s $500 million 3.2% senior notes and a charge of approximately $14 million to write off debt issuance costs for the early retirement of debt at Altium Packaging in the first quarter of 2021.
Income tax expense was $126 million for the nine months ended September 30, 2021 as compared with an income tax benefit of $293 million for the comparable 2020 period. The income tax expense for the nine months ended September 30, 2021 is primarily due to the recognition of $117 million of taxes on the investment gain related to the sale of 47% of Altium Packaging and also includes the recognition of a $40 million deferred tax liability resulting from the asset held for sale designation of Altium Packaging in the first quarter of 2021. The income tax benefit for the nine months ended September 30, 2020 is primarily due to the recognition of taxes on the investment loss related to the deconsolidation of Diamond Offshore.
Diamond Offshore
Amounts presented for Diamond Offshore for the nine months ended September 30, 2020 reflect the periods prior to its deconsolidation in the second quarter of 2020. Contract drilling revenues and contract drilling expenses were $287 million and $254 million for the nine months ended September 30, 2020. Operating and other expenses for the nine months ended September 30, 2020 included an aggregate asset impairment charge of $774 million ($408 million after tax and noncontrolling interests) recognized in the first quarter of 2020. For more information on the deconsolidation of Diamond Offshore see Note 2 of the Notes to Consolidated Condensed Financial Statements included under Item 1 of this Report.
LIQUIDITY AND CAPITAL RESOURCES
Parent Company
Parent Company cash and investments, net of receivables and payables, totaled $3.6 billion at September 30, 2021 as compared to $3.5 billion at December 31, 2020. During the nine months ended September 30, 2021, we received $460 million in dividends from CNA, including a special dividend of $182 million. We also received a $199 million dividend from Altium Packaging in February of 2021. Cash outflows during the nine months ended September 30, 2021 included the payment of $825 million to fund treasury stock purchases, $49 million of cash dividends to our shareholders and $32 million of cash contributions to Loews Hotels & Co. On April 1, 2021, Loews Corporation sold its 47% interest in Altium Packaging to GIC and received $420 million in cash consideration. As a holding company we depend on dividends from our subsidiaries and returns on our investment portfolio to fund our obligations. We
also have an effective Registration Statement on file with the Securities and Exchange Commission (“SEC”) registering the future sale of an unlimited amount of our debt and equity securities from time to time. We are not responsible for the liabilities and obligations of our subsidiaries and there are no Parent Company guarantees.
Depending on market and other conditions, we may purchase our shares and shares of our subsidiaries’ outstanding common stock in the open market, in privately negotiated transactions or otherwise. During the nine months ended September 30, 2021, we purchased 15.7 million shares of Loews Corporation common stock. As of October 29, 2021, we had purchased an additional 0.1 million shares of Loews Corporation common stock in 2021 at an aggregate cost of $5 million. As of October 29, 2021, there were 253,684,412 shares of Loews Corporation common stock outstanding.
Future uses of our cash may include investing in our subsidiaries, new acquisitions, dividends and/or repurchases of our and our subsidiaries’ outstanding common stock. The declaration and payment of future dividends to holders of our common stock will be at the discretion of our Board of Directors and will depend on many factors, including our earnings, financial condition and business needs.
Subsidiaries
CNA’s cash provided by operating activities was $1,354 million for the nine months ended September 30, 2021 and $1,408 million for the comparable 2020 period. The decrease in cash provided by operating activities was driven by the payment of the EWC LPT premium, increased ceded premiums paid and higher taxes paid, partially offset by an increase in gross premiums collected, lower claim payments and a higher level of distributions from limited partnerships. For further information on the EWC LPT see Note 5 of the Notes to Consolidated Condensed Financial Statements included under Item 1 of this Report.
CNA paid cash dividends of $1.89 per share on its common stock, including a special cash dividend of $0.75 per share, during the nine months ended September 30, 2021. On October 29, 2021, CNA’s Board of Directors declared a quarterly cash dividend of $0.38 per share, payable December 2, 2021 to shareholders of record on November 15, 2021. CNA’s declaration and payment of future dividends is at the discretion of its Board of Directors and will depend on many factors, including CNA’s earnings, financial condition, business needs and regulatory constraints.
Dividends from Continental Casualty Company (“CCC”), a subsidiary of CNA, are subject to the insurance holding company laws of the State of Illinois, the domiciliary state of CCC. Under these laws, ordinary dividends, or dividends that do not require prior approval by the Illinois Department of Insurance (the “Department”), are determined based on the greater of the prior year’s statutory net income or 10% of statutory surplus as of the end of the prior year, as well as the timing and amount of dividends paid in the preceding 12 months. Additionally, ordinary dividends may only be paid from earned surplus, which is calculated by removing unrealized gains from unassigned surplus. As of September 30, 2021, CCC was in a positive earned surplus position. CCC paid dividends of $600 million and $855 million during the nine months ended September 30, 2021 and 2020. The actual level of dividends paid in any year is determined after an assessment of available dividend capacity, holding company liquidity and cash needs as well as the impact the dividends will have on the statutory surplus of the applicable insurance company.
CNA has an effective shelf registration statement on file with the SEC under which it may publicly issue debt, equity or hybrid securities from time to time.
Boardwalk Pipelines’ cash provided by operating activities increased $26 million for the nine months ended September 30, 2021 as compared to the comparable 2020 period, primarily due to the change in net income.
For the nine months ended September 30, 2021 and 2020, Boardwalk Pipelines’ capital expenditures were $239 million and $351 million, consisting primarily of a combination of growth and maintenance capital.
In May 2021, Boardwalk Pipelines entered into an amended revolving credit agreement to decrease the borrowing capacity from $1.5 billion to $1.0 billion and extend the maturity date to May 27, 2026, although the maturity date may be further extended for two one-year extensions at Boardwalk Pipelines’ election. As of September 30, 2021, Boardwalk Pipelines had no outstanding borrowings under its revolving credit facility. In the second quarter of 2022, Boardwalk Pipelines expects to retire the $300 million outstanding aggregate principal amount of its 4.0% notes at maturity through available capital resources, including, but not limited to, using available cash, borrowing under its revolving credit facility or publicly issuing debt securities. Boardwalk Pipelines has an effective shelf registration statement on file with the SEC under which it may publicly issue debt securities, warrants or rights from time to time.
Certain of the hotels wholly or partially owned by subsidiaries of Loews Hotels & Co are financed by debt facilities, with a number of different lenders. Each of the loan agreements underlying these facilities contain a variety of financial and operational covenants. As a result of the impacts of COVID-19, Loews Hotels & Co has proactively requested certain lenders, where applicable, to (1) temporarily waive certain covenants to avoid an event of default and/or further restriction of the hotel’s cash balances through the establishment of lockboxes and other measures; (2) temporarily allow funds previously restricted directly or indirectly under the hotel’s underlying loan agreement for the renewal, replacement and addition of building improvements, furniture and fixtures to be used instead for hotel operations and maintenance; and/or (3) defer certain interest and/or principal payments while the hotels operations were temporarily suspended or significantly impacted by a decline in occupancy. Loews Hotels & Co also continues to work with lenders on loans that are being reviewed for extension. These discussions with lenders are ongoing and may require Loews Hotels & Co to make principal paydowns, establish restricted cash reserves or provide guaranties of a subsidiary’s debt to otherwise avoid an event of default. Through the date of this Report, none of Loews Hotels & Co’s subsidiaries is in default on any of its loans.
As of September 30, 2021, Loews Hotels & Co has three subsidiaries with mortgage loans that mature within twelve months and is actively working with lenders to refinance $190 million in current maturities of long-term debt.
In October 2021 Loews Hotels & Co announced the development of the Loews Arlington Hotel and Convention Center in Arlington, Texas. The hotel, for which Loews Hotels & Co will serve as manager and hold a majority equity interest, is expected to open in early 2024 with approximately 888 guestrooms and over 250,000 square feet of function space. The approximately $550 million hotel project will be funded through a mix of partner contributions in 2021 and 2022 before drawing on a $300 million construction loan. Based on the timing of construction relative to the seasonality of Loews Hotels & Co’s business, a Loews Corporation capital contribution may be required.
Through October 29, 2021, Loews Hotels & Co received capital contributions in 2021 of $32 million from Loews Corporation.
INVESTMENTS
Investment activities of our non-insurance subsidiaries primarily consist of investments in fixed income securities, including short term investments. The Parent Company portfolio also includes equity securities, including short sales and derivative instruments, and investments in limited partnerships. These types of investments generally have greater volatility, less liquidity and greater risk than fixed income investments and are included within Results of Operations – Corporate.
The Parent Company enters into short sales and invests in certain derivative instruments that are used for asset and liability management activities, income enhancements to its portfolio management strategy and to benefit from anticipated future movements in the underlying markets. If such movements do not occur as anticipated, then significant losses may occur. Monitoring procedures include senior management review of daily reports of existing positions and valuation fluctuations to seek to ensure that open positions are consistent with the portfolio strategy.
Credit exposure associated with non-performance by counterparties to derivative instruments is generally limited to the uncollateralized change in fair value of the derivative instruments recognized in the Consolidated Condensed Balance Sheets. The risk of non-performance is mitigated by monitoring the creditworthiness of counterparties and diversifying derivatives by using multiple counterparties. Collateral is occasionally required from derivative investment counterparties depending on the amount of the exposure and the credit rating of the counterparty.
Insurance
CNA maintains a large portfolio of fixed maturity and equity securities, including large amounts of corporate and government issued debt securities, residential and commercial mortgage-backed securities, other asset-backed securities and investments in limited partnerships which pursue a variety of long and short investment strategies across a broad array of asset classes. CNA’s investment portfolio supports its obligation to pay future insurance claims and provides investment returns which are an important part of CNA’s overall profitability.
Net Investment Income
The significant components of CNA’s net investment income are presented in the following table. Fixed income securities, as presented, include both fixed maturity securities and non-redeemable preferred stock.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| (In millions) | ||||||||||||||||
| Fixed income securities: | ||||||||||||||||
| Taxable fixed income securities | $ | 360 | $ | 363 | $ | 1,075 | $ | 1,094 | ||||||||
| Tax-exempt fixed income securities | 77 | 80 | 236 | 238 | ||||||||||||
| Total fixed income securities | 437 | 443 | 1,311 | 1,332 | ||||||||||||
| Limited partnership and common stock investments | 77 | 71 | 294 | 30 | ||||||||||||
| Other, net of investment expense | (1 | ) | 3 | 3 | 18 | |||||||||||
| Net investment income | $ | 513 | $ | 517 | $ | 1,608 | $ | 1,380 | ||||||||
| Effective income yield for the fixed income securities portfolio | 4.3 | % | 4.5 | % | 4.3 | % | 4.6 | % | ||||||||
| Limited partnership and common stock return | 3.8 | % | 4.1 | % | 16.4 | % | 1.7 | % |
CNA’s net investment income increased $228 million for the nine months ended September 30, 2021 as compared with the comparable 2020 period, driven by limited partnership and common stock returns partially offset by lower yields in the fixed income portfolio.
Investment Gains (Losses)
The components of CNA’s investment gains (losses) are presented in the following table:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| (In millions) | ||||||||||||||||
| Investment gains (losses): | ||||||||||||||||
| Fixed maturity securities: | ||||||||||||||||
| Corporate and other bonds | $ | 36 | $ | 14 | $ | 115 | $ | (105 | ) | |||||||
| States, municipalities and political subdivisions | 1 | 6 | 39 | |||||||||||||
| Asset-backed | (15 | ) | 6 | (24 | ) | 34 | ||||||||||
| Total fixed maturity securities | 22 | 26 | 91 | (32 | ) | |||||||||||
| Non-redeemable preferred stock | (2 | ) | 25 | 17 | (45 | ) | ||||||||||
| Short term and other | 2 | (5 | ) | 9 | (24 | ) | ||||||||||
| Total investment gains (losses) | 22 | 46 | 117 | (101 | ) | |||||||||||
| Income tax (expense) benefit | (4 | ) | (10 | ) | (23 | ) | 20 | |||||||||
| Amounts attributable to noncontrolling interests | (2 | ) | (3 | ) | (10 | ) | 9 | |||||||||
| Investment gains (losses) attributable to Loews Corporation | $ | 16 | $ | 33 | $ | 84 | $ | (72 | ) |
CNA’s investment gains (losses) decreased $24 million for the three months ended September 30, 2021 as compared with the comparable 2020 period.
CNA’s investment gains (losses) increased $218 million for the nine months ended September 30, 2021 as compared with the comparable 2020 period driven by lower impairment losses and the favorable change in fair value of non-redeemable preferred stock.
Further information on CNA’s investment gains and losses is set forth in Note 3 of the Notes to Consolidated Condensed Financial Statements included under Item 1 of this Report.
Portfolio Quality
The following table presents the estimated fair value and net unrealized gains (losses) of CNA’s fixed maturity securities by rating distribution:
| September 30, 2021 | December 31, 2020 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Estimated Fair Value | Net Unrealized Gains (Losses) | Estimated Fair Value | Net Unrealized Gains (Losses) | |||||||||||||
| (In millions) | ||||||||||||||||
| U.S. Government, Government agencies and Government-sponsored enterprises | $ | 2,938 | $ | 57 | $ | 3,672 | $ | 117 | ||||||||
| AAA | 3,778 | 371 | 3,627 | 454 | ||||||||||||
| AA | 7,737 | 833 | 7,159 | 1,012 | ||||||||||||
| A | 9,538 | 1,159 | 9,543 | 1,390 | ||||||||||||
| BBB | 18,505 | 2,215 | 18,007 | 2,596 | ||||||||||||
| Non-investment grade | 2,573 | 123 | 2,623 | 149 | ||||||||||||
| Total | $ | 45,069 | $ | 4,758 | $ | 44,631 | $ | 5,718 |
As of September 30, 2021 and December 31, 2020, 1% of CNA’s fixed maturity portfolio was rated internally. AAA rated securities included $1.7 billion and $1.8 billion of pre-refunded municipal bonds as of September 30, 2021 and December 31, 2020.
The following table presents CNA’s available-for-sale fixed maturity securities in a gross unrealized loss position by ratings distribution:
| September 30, 2021 | Estimated Fair Value | Gross Unrealized Losses | ||||||
|---|---|---|---|---|---|---|---|---|
| (In millions) | ||||||||
| U.S. Government, Government agencies and Government-sponsored enterprises | $ | 1,200 | $ | 9 | ||||
| AAA | 388 | 5 | ||||||
| AA | 906 | 16 | ||||||
| A | 1,191 | 18 | ||||||
| BBB | 1,187 | 31 | ||||||
| Non-investment grade | 396 | 10 | ||||||
| Total | $ | 5,268 | $ | 89 |
The following table presents the maturity profile for these available-for-sale fixed maturity securities. Securities not due to mature on a single date are allocated based on weighted average life:
| September 30, 2021 | Estimated Fair Value | Gross Unrealized Losses | ||||||
|---|---|---|---|---|---|---|---|---|
| (In millions) | ||||||||
| Due in one year or less | $ | 133 | $ | 5 | ||||
| Due after one year through five years | 709 | 13 | ||||||
| Due after five years through ten years | 2,639 | 33 | ||||||
| Due after ten years | 1,787 | 38 | ||||||
| Total | $ | 5,268 | $ | 89 |
Duration
A primary objective in the management of CNA’s investment portfolio is to optimize return relative to the corresponding liabilities and respective liquidity needs. CNA’s views on the current interest rate environment, tax regulations, asset class valuations, specific security issuer and broader industry segment conditions as well as domestic and global economic conditions, are some of the factors that enter into an investment decision. CNA also continually monitors exposure to issuers of securities held and broader industry sector exposures and may from time to time adjust such exposures based on its views of a specific issuer or industry sector.
A further consideration in the management of CNA’s investment portfolio is the characteristics of the corresponding liabilities and the ability to align the duration of the portfolio to those liabilities and to meet future liquidity needs, minimize interest rate risk and maintain a level of income sufficient to support the underlying insurance liabilities. For portfolios where future liability cash flows are determinable and typically long term in nature, CNA segregates investments for asset/liability management purposes. The segregated investments support the long term care and structured settlement liabilities in Other Insurance Operations.
The effective durations of CNA’s fixed income securities and short term investments are presented in the following table. Amounts presented are net of payable and receivable amounts for securities purchased and sold, but not yet settled.
| September 30, 2021 | December 31, 2020 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Estimated Fair Value | Effective Duration (Years) | Estimated Fair Value | Effective Duration (Years) | |||||||||||
| (In millions of dollars) | ||||||||||||||
| Investments supporting Other Insurance Operations | $ | 18,431 | 9.3 | $ | 18,518 | 9.2 | ||||||||
| Other investments | 28,520 | 5.1 | 28,839 | 4.5 | ||||||||||
| Total | $ | 46,951 | 6.7 | $ | 47,357 | 6.3 |
CNA’s investment portfolio is periodically analyzed for changes in duration and related price risk. Certain securities have duration characteristics that are variable based on market interest rates, credit spreads and other factors that may drive variability in the amount and timing of cash flows. Additionally, CNA periodically reviews the sensitivity of the portfolio to the level of foreign exchange rates and other factors that contribute to market price changes. A summary of these risks and specific analysis on changes is included in the Quantitative and Qualitative Disclosures about Market Risk included under Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2020.
Short Term Investments
The carrying value of the components of CNA’s Short term investments are presented in the following table:
| September 30, 2021 | December 31, 2020 | |||||||
|---|---|---|---|---|---|---|---|---|
| (In millions) | ||||||||
| Short term investments: | ||||||||
| U.S. Treasury securities | $ | 916 | $ | 1,702 | ||||
| Other | 219 | 205 | ||||||
| Total short term investments | $ | 1,135 | $ | 1,907 |
CRITICAL ACCOUNTING ESTIMATES
Certain accounting policies require us to make estimates and judgments that affect the amounts reflected in the Consolidated Condensed Financial Statements. Such estimates and judgments necessarily involve varying, and possibly significant, degrees of uncertainty. Accordingly, certain amounts currently recorded in the financial statements will likely be adjusted in the future based on new available information and changes in other facts and circumstances. See the Critical Accounting Estimates and the Insurance Reserves sections of our MD&A included under Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020 for further information.
ACCOUNTING STANDARDS UPDATE
For a discussion of accounting standards updates that have been adopted or will be adopted in the future, please read Note 1 of the Notes to Consolidated Condensed Financial Statements included under Item 1 of this Report.
FORWARD-LOOKING STATEMENTS
Investors are cautioned that certain statements contained in this Report as well as in other of our and our subsidiaries’ SEC filings and periodic press releases and certain oral statements made by us and our subsidiaries and our and their officials during presentations may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). Forward-looking statements include, without limitation, any statement that does not directly relate to any historical or current fact and may project, indicate or imply future results, events, performance or achievements. Such statements may contain the words “expect,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “will be,” “will continue,” “will likely result,” and similar expressions. In addition, any statement concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible actions taken by us or our subsidiaries are also forward-looking statements as defined by the Act. Forward-looking statements are based on current expectations and projections about future events and are inherently subject to a variety of risks and uncertainties, many of which are beyond our control, that could cause actual results to differ materially from those anticipated or projected.
Developments in any of the risks or uncertainties facing us or our subsidiaries, including those described under Part II, Item 1A, Risk Factors in this Report, Part I, Item 1A, Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2020, Part II, Item 1A, Risk Factors in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2021 and June 30, 2021 and in our other filings with the SEC, could cause our results to differ materially from results that have been or may be anticipated or projected. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements. Forward-looking statements speak only as of the date they are made and we expressly disclaim any obligation or undertaking to update these statements to reflect any change in our expectations or beliefs or any change in events, conditions or circumstances on which any forward-looking statement is based.
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